The mortgage foreclosure process was prolonged after the financial crisis. I analyze its impact on mortgage defaults and post-foreclosure modifications. When a household fails to repay a mortgage, the delinquent household can stay in its home without paying rent or making a mortgage payment until the foreclosure process terminates, leading to an increase in defaults. My quantitative exercise shows that unexpected declines in house prices with foreclosure delays that mirror the financial crisis triple the mortgage delinquency rate, while it temporarily reducing the foreclosure rate by half. An increase in mortgage defaults motivates financial intermediaries to voluntarily modify loan terms after initiating the foreclosure process to mitigate their losses.
All Science Journal Classification (ASJC) codes
- Economics and Econometrics